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Global Credit Research New Issue 6 MAR 2007 New Issue: Fernley (City of) NV MOODY'S ASSIGNS A3 RATING TO CITY OF FERNLEY, NV, G.O.L.T. WATER AND SEWER BONDS (ADDITIONALLY SECURED BY PLEDGED REVENUES) SERIES 2007 $50 MILLION OF DEBT AFFECTED Water/Sewer NV Moody's Rating Opinion NEW YORK, Mar 6, 2007 Moody's Investors Service has assigned an A3 rating to the City of Fernley, Nevada, General Obligation (Limited Tax) Water and Sewer Bonds (Additionally Secured by Pledged Revenues), Series 2007 in the amount of $50 million. The current offering is secured by the full faith and credit of the city within the constitutional and statutory limitations of the city's operating levy plus net revenues from the water and sewer utilities. The A3 rating primarily reflects the city's growing economy, sound financial operations, and aggressive borrowing plans. SMALL, FAST GROWING CITY IN WEST CENTRAL NEVADA; FERNLEY INCORPORATED IN 2001 The City of Fernley is located in Lyon County in northwest Nevada about 39 miles east of the City of Reno (GOLT rated Aa3) on Interstate 80 with an estimated population of 19,700 residents (2006). Population growth has been rapid, increasing about 107% since 2002. Similarly, growth in taxable values has been robust, increasing at an average annual rate of 20.0% over the past five years to a full value of $1.46 billion (2007); preliminary 2008 tax base estimates project a 33% increase in taxable values. Growth in taxable values has been supported by continued activity at the city's two industrial parks and residential development. Major employers include large distribution centers, manufacturing, as well as casinos. Moody's expects tax base growth will moderate from historical levels due to a recent trend of declining housing permits and a regional slowdown in residential construction although future growth is expected to be supported by increased retail commercial activity and somewhat from continued availability of affordable housing and developable land relative to nearby Reno and Sparks. The city incorporated in 2001, resident wealth levels for the county were below state averages with per capita and median family income at 84.3% ($18,543) and 88.3% ($44,887) of state levels, respectively. CONSERVATIVE FINANCIAL OPERATIONS; OPERATING SURPLUSES DUE TO GROWTH RELATED REVENUES Between fiscal 2001 and fiscal 2005 the city maintained a steady general fund balance of $864,000, or about 31% of general fund revenues. During these years, the city took advantage of sizeable operating surpluses in its general fund and transferred a portion of its surplus to its capital projects fund to comply with conservative internal financial policies and in anticipation of significant infrastructure needs, including the current project. The annual surpluses were attributable primarily to growth related revenues received from building permit and planning fees. In fiscal 2006, despite a decline in license and permit revenues from the prior year the city increased its general fund balance to 26.6% of general fund revenues ($945,000). Management attributes the increase in reserves primarily to increased revenue from property taxes due to increased assessed values, steady utility franchise fee revenues and conservative budgeting. General fund operations are supported primarily by licenses and permits (63%) followed by property taxes Management has budgeted for fiscal 2007 reserves to be similar to fiscal 2006 due to an increase in property tax revenues despite a projected decline in permit fees. Moody's notes that although the city's reliance on construction related revenues is offset somewhat by a projected increase in property tax revenues and conservative financial policies, future credit reviews will focus on the accuracy of forecasted growth related revenues, as well as management's ability to control government expenditures as necessary. ISSUE RATING General Obligation (Limited Tax) Water and Sewer Bonds (Additionally Secured by Pleged Revenues) Series 2007 A3 Sale Amount $50,000,000 Expected Sale Date 03/07/07 Rating Description General Obligation Bonds ---PAGE BREAK--- RECENT PROPERTY TAX CAP LEGISLATION SHOULD NOT HAVE A SIGNIFICANT NEGATIVE IMPACT FOR THE CITY OF FERNLEY In April 2005, the state approved Assembly Bill 489 which limits annual increases in property tax bills for residents to Commercial properties and second home owners will also have a tax cap equal to the lesser of 8% or the average annual change in taxable values over the last ten years. The legislation went into effect in fiscal 2006. At this time, Moody's does not expect the legislation to have a significant financial impact on the city of Fernley. Although growth in property tax revenues may slow down, Moody's notes the majority of property tax revenue growth in Fernley is derived from new construction which is exempt from abatement the first year it comes on to the tax rolls. WATER AND SEWER UTILITIES WILL RELY ON INCREASE IN USER RATES AND CONNECTION FEES TO HELP OFFSET SLOWDOWN IN GROWTH REVENUES The city's direct debt burden is low at 0.3% after adjusting for self-supporting enterprise debt, including the current sale, direct debt burden as a percentage of full value is a somewhat high 3.9%. The payout of the city's debt is slow 15.5% in ten years. Future debt issuances in the near-term are currently limited to additional general obligation limited tax water and sewer bonds additionally secured by the utility net revenues in the approximate amount of $15 million within the next year. The 2007 bonds are secured by the full faith and credit of the city within the constitutional and statutory limitations of the city's operating levy plus net revenues of the water and sewer utility and alternate water funds which include the periodic sale of non-potable groundwater for agricultural uses. Importantly, Moody's notes although the current sale is secured by a limited tax levy, if necessary, taxes levied by overlapping units for purposes other than the payment of their bonded indebtedness must be reduced to accommodate sufficient debt service levying capacity. The water and sewer systems serve residents within the city boundaries with an estimated 7,783 and 7,730 connections, respectively. The bulk of bond proceeds will be used to construct a new water treatment plant to comply with minimum EPA arsenic guidelines, effective January 2009, as well as accommodate expected future demand. Construction of the treatment plant is expected to be completed by January 2009. Significantly, Moody's notes the current sale represents an aggressive borrowing plan with debt service coverage based somewhat on speculative growth. Between calendar year 2002 and 2004, building permits increased from 463 to 1,584 (242%). By CY2006 permit activity dropped significantly to 539 permits, a 66% decline from CY04. City management projects continued slowed growth in construction activity will be offset somewhat by a substantial increase in user rates and connection fees; the increases will be based on an ongoing rate study which is expected to be completed by mid-April. Management is confident user rates and connection fees will be increased by a simple majority of city council and implemented by July 2007. Management attributes their historically low user rates and connection fees to utilization of cash for capital needs. Assuming these new user rates and connection fees are implemented, city management projects a minimum of 150 new building permits would be sufficient to cover debt service on the current sale as well as the additional $15 million to be issued in 2008. Moody's anticipates relatively thin coverage projections will improve as user rates and connection fees are expected to increase significantly by mid-April with collections beginning by the beginning of fiscal 2008. In addition to the current sale the city has two outstanding superior lien water and sewer debt issues, both are expected to be paid by 2013. Including all outstanding debt, in fiscal 2004 and fiscal 2005 combined water and sewer system net revenues, net of system connection fees, provided a thin 0.25 times and 0.30 times maximum annual debt service (MADs) coverage in 2010, respectively. Including connection fees, coverage was a satisfactory 1.21 and 1.48 times MADs in FY04 and FY05, respectively. In fiscal 2006, as residential development slowed, coverage of MADs declined similarly; net of system connection fees coverage of MADs was 0.35 times and including connection fees coverage of MADs was 0.95 times. Moody's notes management has conservatively budgeted a significant slowdown in water and sewer connections as residential development slows in the region. However, this expected decline in activity is offset somewhat by the significant planned increases in user rates and connection fees noted above. The debt ratio for the combined systems was low at 1.7% in FY06, but is expected to increase significantly with the current sale. The combined enterprises maintain healthy reserves. Net working capital for the combined enterprise has improved steadily since 2002 and was 287.5% of gross revenue, or approximately $17.3 million in FY06. Moody's anticipates coverage, including one time fees, will remain sufficient given a trend of healthy operations of the water and sewer enterprises, prudent financial management including significant rate and fee increases in fiscal 2007 and despite an anticipated slowdown in residential development over the life of the bonds. KEY STATISTICS: Current estimated population: 19,700 Lyon County 1999 per capita income: $18,543 (84.3% of state) ---PAGE BREAK--- Lyon County 1999 median family income: $44,887 (88.3% of state) FY 2007 full valuation: $1.46 billion Full value per capita: $74,134 Gross direct debt burden: 3.9% of full market value Direct debt burden, net of self-supported debt: 0.3% Overall debt burden: 1.8% Payout of principal (10 years): 15.5% FY06 general fund balance: $945,000 (26.6% of general fund revenues) Dan Steed Analyst Public Finance Group Moody's Investors Service Jeffrey Thomas Backup Analyst Public Finance Group Moody's Investors Service Matthew Jones Senior Credit Officer Public Finance Group Moody's Investors Service Contacts Journalists: (212) 553-0376 Research Clients: (212) 553-1653 © Copyright 2007, Moody's Investors Service, Inc. and/or its licensors including Moody's Assurance Company, Inc. (together, "MOODY'S"). All rights reserved. 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